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2/27/09

President Obama set up a long and bloody battle with Republicans today when he unveiled an almost $4 trillion budget that raises taxes, slashes military spending and increases the national deficit to its highest level since World War II.

Mr Obama's first budget included a series of contentious provisions that produced howls of protest from Republicans, triggering what will be a major fight on Capitol Hill where the president has to get it passed by both the House and Senate.

The 140-page budget outlines forecasts an enormous $1.75 trillion deficit for this fiscal year, which ends in October, in part because it makes clear that Mr Obama is anticipating yet another massive bailout for the banking sector, on top of the $700 billion package passed last October.

Such a move would be unpopular with the American public and strongly opposed by Republicans and some Democrats on Capital Hill, because the banking sector is widely blamed for the economic crisis. The document includes a $750 billion set-aside in case more rescue funds for Wall Street are needed.

The budget also includes a $634 billion "reserve fund" to cover roughly two-thirds of Mr Obama's projected 10-year, $1 trillion plan to provide health coverage to all Americans.

"It is jaw-dropping," said Mary Matalin, a former Republican White House adviser. She called the spending provisions "the likes of which we've never seen". She added: "I don't know if it's going to pass."

Key to Mr Obama's hopes of securing passage will be three moderate Republicans in the Senate - Maine's Susan Collins and Olympia Snowe and Pennsylvania's Arlen Specter. They were the only congressional Republicans who voted for the president's $787 billion economic stimulus plan. Without their support it would not have passed.

Half the cost of the hugely ambitious health care overhaul, something that ended in abject failure under Bill Clinton, will be paid for by higher taxes on wealthy Americans. Mr Obama will allow tax cuts given to couples earning more than $250,000 - and individuals taking in over $200,000 - to expire at the end of 2010.

In essence, the marginal tax rate on their incomes will rise from 35 to almost 40 per cent. Mr Obama also wants to reduce the rate by which wealthier people can reduce their taxes through giving to charity, deducting interest paid on their mortgages and other expenses.

John Boenher, the Republican House Minority Leader, said: "This budget makes clear that the era of big government is back and Democrats want you to pay for it."

Mike Pence, a fellow House Republican, said: "There will be overwhelming opposition from the American people and... Republicans to the idea of raising taxes during a recession."

"Wow," said Robert Bennett, a Utah Republican. "There's going to be a fight over this one."

The $1.75 trillion deficit will represent more than 12 per cent of gross domestic product, the highest since 1945 and double the previous post-war record of six per cent in 1983, under Ronald Reagan. Mr Obama inherited a more $1.3 trillion deficit from President Bush, but it continues to balloon as Mr Obama tries to spend the country out of recession.

Mr Obama said: "We must add to our deficits in the short-term to provide immediate relief to families and get our economy moving."

The President, who says he wants to cut the deficit to $533 billion within four years, called his budget "an honest accounting of where we are and where we intend to go," and spoke of the "hard choices that lie ahead".

Much of the plan to cut the deficit by 2012 rests on cutting expenditure in Iraq and Afghanistan. Yet Mr Obama has just ordered an additional 17,000 troops to Afghanistan and he faces sceptics even in own party that he can rein in military spending.

Unlike Bush, who never included the costs of the wars in Iraq and Afghanistan in his annual budgets, Mr Obama has inserted them. He is asking for $75 billion this year for both wars - on top of $40 billion already approved by Congress - and $130 billion in 2010. After that, the wars are being budgeted at $50 billion annually over the next several years.

Other contentious issues include plans to slash subsidies to farms with revenues above $500,000 - a concern to rural Democrats and Republicans - and greatly curtailing payments to hospitals and insurance companies under the government-run health programmes for the elderly and poor.

That is sure to incite battles with doctors, hospitals, health insurance companies and the powerful pharmaceutical industry.

Obama also made clear in his prime-time address to Congress on Tuesday that he wants to scrap an array of "Cold War-era" weapons programmes, another move that will be fiercely resisted by the military lobby. His plan to place expensive carbon caps on industry will also be attacked by Republicans.